Refinancing's Finer Points

Basic Rules Have Changed In Wake Of Subprime Crisis

It Pays To Be Informed

Cover Story: Knowledge Is Power When It Comes To Borrowing

June 15, 2008|By THERESA SULLIVAN BARGER; Special To The Courant

With the slowdown in the real estate market, and interest rates at historic lows, many lenders are pushing refinancing.

But in the wake of the subprime mess, they have tightened lending practices. A few years ago, a home buyer with a credit score above 700 would qualify for the best rates. Today, purchasers need to have a credit score of at least 720 for the best rates, and those refinancing need at least 740, with some banks requiring 760, said Dale H. Ruth, mortgage consultant with Norcom Mortgage in Avon.

Refinancing also comes with $2,000 to $2,500 in fees that you will pay, one way or another.

While the rules of thumb about when to refinance have changed, the basic truth that there's no such thing as a free lunch hasn't.

If an offer sounds too good to be true, look at the fine print. There's a good chance there are hidden fees, prepayment penalties, a bait-and-switch set-up or some other gimmick that could cost you plenty.

A decade ago, conventional wisdom recommended that homeowners refinance only if they could lower their interest rate by 2 percentage points. Today, refinancing makes sense if borrowers can lower their interest rate by as little as three-quarters of a percentage point. If they can shorten the term of their loan, that's an added benefit.

If you have paid several years into a 30-year loan, it may not make sense to refinance at a slightly lower rate for another 30-year mortgage - but if you switch to a 20-year fixed-rate mortgage and get a lower interest rate, you'll save interest payments over the life of the mortgage.

POINTS AND CLOSING COSTS

Should you pay points? As with any mortgage, it depends. If you plan to own the house for three years or less, advisors suggest not paying points up front and instead paying for them in the form of a higher interest rate. But if you plan to own the home for more than three years, experts suggest paying points at closing and getting a lower interest rate. The same principle holds true for wrapping closing costs into the loan or paying them at the closing.

But if you have to pay $4,000 in points just to lower your mortgage a little each month, Ruth said, ask yourself, "What am I achieving?"

Bill McCue, owner of McCue Mortgage, headquartered in New Britain, advises against taking cash out in a refinancing - whether it's to pay for a home-improvement project, college tuition, vacation or to pay off debt - because it will raise the interest rate, increase the amount borrowed and cost more in the long run.

In fact, if you plan to stay in your home for more than three years but can't afford to pay the refinancing closing costs up front, McCue advises against refinancing. Better to pay a little extra each month toward your principle, he said.

Beware of "no closing cost" loans, he said. "You're either going to increase your interest rate or the amount borrowed."

Likewise, be wary of offers for 2 percent interest, which is a teaser rate that expires in a few months then jumps to a higher rate. And if your lender offers to lower your monthly payment without lowering your interest rate, the deal probably involves lengthening the term of the mortgage.

Philip Defronzo, owner of Norcom Mortgage in Avon, says refinancing to consolidate debt makes sense when people are paying 20 percent on credit cards - but only if they cut up their cards and change their spending habits.

Financial experts advise against the practice of using a house as an ATM because, with the debt spread out over 25 or 30 years, consumers wind up paying interest fees many times the items' purchase price.

TITLE INSURANCE DISCOUNT

If you've refinanced or purchased your home within the past 10 years, expect a 40 percent discount on your title insurance, said Ed Browne, vice president of legal and industry relations with CATIC, New England's largest title insurance underwriter. The discount applies to the amount of the prior mortgage only; if you refinance a larger sum, the amount that exceeds the original mortgage is insured at full price.

In addition, if you're refinancing a home you've purchased or refinanced within the past 10 years, the title search fee should also be less than that charged when a home is being purchased, Browne said.

While lawyers generally charge a flat fee to handle a home purchase or refinance, they also receive 60 percent commission on title insurance, he said.

The title insurance underwriter, like CATIC, gets the other 40 percent.

If consumers believe they have paid the full title insurance fee when they were entitled to the 40 percent discount, he said, "we will refund the consumer."

APPLES TO APPLES

If you're thinking of refinancing and want to be sure you're comparing apples to apples, insist on a written "good faith estimate" outlining all the fees and charges you'll pay, said Defronzo and Jude Satalino, loan representative with McCue Mortgage.